DERIVATIVE ACTIONS -- FORCING DIRECTORS TO ACT
I. Introduction Corporations can become large and powerful entities that while responsible to a large number of shareholders are controlled by a small group of directors. Directors often forget this responsibility, and a corporation’s misdirected actions may well bring harm to the shareholders and the corporation itself. To remedy these errors, shareholders may under Florida Statute §607.07401 bring suit on behalf of the corporation against one or more directors. Below is a quick primer to assist the unfamiliar lawyer in bringing suit in a derivative action. II. Demand Only a shareholder of a corporation can file suit on a corporation’s behalf as a derivative action. Failure to offer proof of such ownership is a fatal defect in the pleading. The person filing suit may be the beneficial recipient of shares through a voting trust. Moreover, a person cannot disapprove of a corporation’s conduct, buy shares, and then commence suit. Claims may only be brought for corporations while the person was a shareholder. There is some leeway in this regard. For example, a spouse who gained shares as partial settlement during a divorce had standing for conduct during the other spouse’s ownership. Kaplus v. First Continental Corp., 711 So.2d 108 (Fla. 3d DCA 1998). Courts have even allowed suits to progress where the shareholder has a personal claim against the corporation. First American Bank and Trust by Levitt v. Frogel, 726 F.Supp. 1292 (S.D. Fla. 1989). Some jurisdictions allow standing as long as the conduct occurred while share were owned. DiGovanni v. All-Pro Golf, Inc., 332 So.2d 91 (Fla. 2d DCA 1976). Others are not so forgiving by ruling that an action abated if a shareholder were to give up control of all shares during the action. Schilling v. Belcher, 582 F.2d 985 (5th Cir. 1978). Finally, not-for- profit corporations are exempt from chapter 607 actions. Ferola v. Blue Reef Holding Corp., Inc., 719 So.2d 389 (Fla. 4th DCA 1998). Suits are not limited to derivative actions where there is direct ownership of the corporation. Gadd v. Pearson, 351 F.Supp. 895 (M.D. Fla. 1972). When the corporation is the parent of another, a double derivative action is possible. This action may even be permissible when the initial corporation has only a minority interest in the second. West v. West, 825 F.Supp.1033 (N.D. Ga. 1992). This demand must be stated separately to the first and then second corporation, hence the name of the action. Failure to characterize the particular suit as a double derivative is fatal to the pleading. Crow v. Context Industries, Inc., 260 So.2d 865 (Fla. 3d DCA 1972). The attorney that considers filing a double derivative action should be cognizant of the fact there is little law on point within Florida and will need to look elsewhere such as Delaware for more detailed guidance in many situations. III. Notice Mere filing of a complaint does not begin the usual judicial process found in most other suits. First, notice of the demands to be made must be given to the directors 90 days prior to the commencement of any suit. This waiting period is to insure the directors recognize there is a potential suit, and insure the corporation make an appearance at court proceedings. Francini v. International Marble Trades, Inc., 546 So.2d 777 (Fla. 3d DCA 1989) (corporation required to be named as an indispensable party.) Suit may be brought earlier than 90 days from the day of demand if written notice is received stating the directors refuse or intend to ignore the demand. The prospective claimant may also press forward if less than 90 days have passed by informing the court of a belief that neglecting the action will lead to greater harm. Doing so may have negative consequences should the suit fail. Demand may be ignored when making one would obviously be futile such as when the named directors are a family that controls the corporation. Cheryl Guagliardo et al. v. Joe L. Guagliardo et al, 5 Fla. L. Weekly Supp. 395 (Fla. 13th Jud. Cir. 1998). A formal complaint can only be filed after these steps are taken. IV. Internal Determination Corporations may file a motion to stay proceedings after the filing of a complaint in order to complete an internal investigation. This preserves the corporation’s right should an investigation take longer than 90 days. More importantly, the court may dismiss an action on the recommendation of the corporation based on the results of the investigation; provided the investigation was conducted independently. The key word is independent, and independence is always determined by a facts and circumstances test for each case. McDonough v. Americom International Corp., 950 F.Supp. 1016 (M.D. Fla. 1995). A determination to recommend dismissal based on the results of an investigation might be conducted by either 1) a majority of the independent directors provided such still constitutes a quorum; 2) a majority vote of a committee comprised by at least two or more independent directors appointed by a majority vote of independent directors even if this number is not enough for a quorum; or 3) a panel of one or more independent persons appointed by the court. While the statutory language given is that a court “may" dismiss, the interpretation is closer to “should" dismiss. Again, independence matters in giving leeway for allowing a suit to continue despite a negative determination. Kloha v. Duda et al, 226 F.Supp. 2d 1342 (M.D. Fla. 2002). V. Settlements The clear language of the statute expresses the legislatures opinion regarding settlement once an action has commenced. A proceeding commenced under this section may not be discontinued or settled without the court approval. If the court determines that a proposed discontinuance or settlement will substantially affect the interest of the corporation shareholders or a class, series, or voting group of shareholders, the court shall direct that notice be given to the shareholders affected. The court may determine which party or parties to the proceeding shall bear the expense of giving notice. Florida Statutes §607.07401(4) The court is further restricted by the inability to modify settlements. A court must either take or reject a settlement in its entirety; there is no line item veto. Levinson v. American Laser Corp., 438 So.2d 179 (Fla. 2d DCA 1983). VI. Damages and Fees Damages sought in a complaint may consist of the usual requests for damages in a suit. There are no special limitations. However, there is case law preventing the award of punitive damages as derivative actions are considered equitable actions. Lanman Lithotec, Inc. v. Gurwitz, 478 So.2d 475 (Fla. 5th DCA 1985). Fees can be awarded to the prevailing party, plaintiff or defendant. Fortunately, plaintiffs are no longer required to post a bond or other security to cover the potential costs of litigation. Another favorable consideration to suit is the availability of fee enhancements to damage awards. Lane v. Head, 566 So.2d 508 (Fla. 1990). (The enhancement is awarded to cover fees, and attorneys may not take an additional percentage out of this enhancement as further satisfaction of a contingency award) By the same token, the defense might also be awarded fees at the discretion of the court under this statute should the suit be without merit. Therefore, pressing to bypass the 90 day waiting period may influence the finder of fact in this area should the complaint have little merit.